Perishability of Online Grocers*, The

Decision Sciences, May 2007 by Cattani, Kyle, Perdikaki, Olga, Marucheck, Ann

Yrjôlâ (2001) suggests that neither model is dominant. She argues that a leverage model may serve as a platform for low-risk growth, but, over time, the pure-direct model might lead to a more profitable cost structure. Differences in these two distribution strategies suggest that supply chain length is linked to an online grocer's cost structure and may be a determinant in explaining differences in the relative profitability between two online competitors. In this work we explore the effect of supply chain length on performance for online grocers.

A second research question addresses the online grocer's product offering. While the literature is inconclusive with respect to which distribution strategy is superior for an online grocer, the decision also might depend on the type of product offered. Food products can be categorized as perishable or nonperishable, with perishables characterized by a relatively short shelf life. The distinction is important because the two categories differ with respect to their profit margins, quality characteristics, shelf life, and handling/packaging requirements. Tsiros and ; Heilman (2005) provide a more detailed discussion of the problems associated with perishable grocery products.

While some argue that an online grocer needs to offer both perishable and nonperishable products to the customer in a single shopping experience, just as a traditional supermarket would, others suggest that a focused strategy could be superior from a profitability standpoint (Tanskanen et al., 2002). In fact, many online grocers have chosen to focus their offerings to improve profitability. Given that perishables have special handling needs and short life spans, the costs of outdating, spoilage, and waste might justify the decision to offer a wide variety of nonperishable products (Starr, 2003). Peapod and Net-grocer primarily offer nonperishable items and avoid some of the high costs involved in packaging, storing, and delivering perishables to customers' homes. In contrast, other online grocers such as Fresh Direct, focus on perishable products and offer very few nonperishables. Their strategy offsets the challenges of handling perishables with the higher prices and profit margins that can be earned, particularly if their products are fresher and of higher quality than a leverage grocer can offer.

Perishables often entail higher shopping risk for the online customer, who usually prefers to make personal quality comparisons in selecting perishable products (Boyer & Huit, 2005a; Tsiros & Heilman, 2005). When the order picking of perishable products is performed by someone else, the customer might decide that the quality of the delivered product is unacceptable or not what he/she would have selected. Because of the costs and various risks involved with offering perishable products online, Starr (2003) argues that offering nonperishables is a sound strategy for any online grocer seeking to improve profitability. Conversely, Scherega (2001) argues that customers tend to be very price sensitive with respect to nonperishables and might be unwilling to pay the additional shipping and handling costs associated with an online transaction. Given nonperishables' small profit margins, an online grocer might find this strategy to be less profitable.